Introduction

Acquisition financing is a central part of many private equity and strategic M&A transactions in Turkey. Instead of financing the entire purchase price with equity, an investor may combine its own capital with bank loans, shareholder financing or other debt.

Where debt forms a significant part of the purchase price, the transaction is commonly described as a leveraged buyout (LBO).

A typical structure involves an investor establishing or using an acquisition vehicle, borrowing part of the purchase price and acquiring the shares of a Turkish target company. The lender may seek security over the acquired shares, acquisition vehicle assets and, where legally permissible, assets or cash flows connected with the target.

The critical Turkish-law issue is that the target company cannot simply finance the acquisition of its own shares.

Article 380 of the Turkish Commercial Code No. 6102 (“TCC”) expressly restricts financial assistance by a joint-stock company for the acquisition of its shares. Transactions involving loans, advances or security must therefore be analysed carefully when acquisition debt is intended ultimately to be supported by the target business.

Leveraged acquisitions consequently require coordination between corporate law, banking, security, tax, merger control and insolvency considerations.

What Is a Leveraged Buyout?

A leveraged buyout is an acquisition financed substantially through borrowed money.

For example, an investor may agree to acquire a Turkish company for EUR 50 million and fund the acquisition with:

• EUR 20 million investor equity; and
• EUR 30 million acquisition debt.

The debt may be borrowed by a special-purpose acquisition vehicle established for the transaction.

The acquisition vehicle purchases the target shares and becomes the target’s parent company after closing.

The central commercial expectation is generally that future returns generated by the target group will help finance or refinance the acquisition structure.

This distinguishes an LBO from an ordinary acquisition funded entirely with investor capital.

Acquisition Vehicle Structure

A common transaction structure may involve:

Investor → Acquisition Company → Target Company

The acquisition company, often referred to internationally as a BidCo, enters into the share purchase agreement and obtains acquisition financing.

At closing:

1. The investor contributes equity to BidCo.
2. The lender advances the acquisition loan to BidCo.
3. BidCo pays the purchase price.
4. The seller transfers the target shares to BidCo.

The target does not itself purchase its shares and should not automatically become the borrower of the acquisition financing.

Whether the acquisition company should be established in Turkey or another jurisdiction depends on tax, financing, regulatory and investment considerations.

The Financial Assistance Prohibition Under TCC Article 380

Financial assistance is one of the most important legal restrictions in Turkish acquisition finance.

TCC Article 380 provides that legal transactions under which a joint-stock company gives an advance, loan or security to another person for the purpose of acquiring its own shares are invalid.

The prohibition is designed to protect the company’s assets and prevent the rules restricting acquisition of a company’s own shares from being circumvented.

The provision may become relevant where the acquisition lender seeks:

• A guarantee from the target;
• A mortgage over target-owned real estate;
• Security over target bank accounts;
• A pledge over target receivables;
• A loan from the target to BidCo;
• Cash transferred from the target specifically to repay acquisition debt.

If the relevant assistance is sufficiently connected with financing the purchase of the target’s own shares, TCC Article 380 must be carefully considered.

Why Financial Assistance Matters in LBO Transactions

Assume BidCo borrows EUR 30 million to buy a Turkish joint-stock company.

The lender may naturally prefer both BidCo and the target to guarantee repayment.

Commercially, this seems logical because the target owns the operating assets and produces the cash flow.

Legally, however, requiring the target at closing to guarantee the debt used to purchase its own shares may fall directly within the financial assistance prohibition.

The parties therefore cannot assume that a standard international LBO security package can simply be reproduced in Turkey.

The financing documents and closing sequence must be analysed under Turkish corporate law before they are signed.

Financial Assistance Is Not Limited to Cash Loans

TCC Article 380 expressly refers to:

• Advances;
• Loans;
• Security.

The provision can therefore affect more than direct cash payments.

A guarantee, mortgage or pledge granted by the target to secure the buyer’s acquisition financing may potentially fall within the prohibition where the required purpose connection exists.

The statutory sanction is particularly significant: the relevant financial assistance transaction is void.

A lender therefore has a strong interest in ensuring that the security package does not depend on an arrangement that may later be challenged as legally ineffective.

Exceptions to the Financial Assistance Prohibition

TCC Article 380 contains limited exceptions.

The prohibition does not apply in the same manner to transactions carried out by credit and financial institutions within their ordinary business activities.

The provision also contains an exception concerning financial assistance provided to employees of the company or its subsidiaries for the acquisition of shares, subject to statutory reserve restrictions.

These exceptions are narrow and generally do not provide a broad exemption for ordinary private equity acquisition financing.

Turkey does not provide a general statutory “whitewash” mechanism comparable to mechanisms available in some other jurisdictions that would allow the transaction to proceed merely through shareholder approval and solvency confirmation.

Share Pledge Over the Target

A lender financing an acquisition will commonly request a pledge over the shares acquired by BidCo.

This is structurally different from the target itself providing security.

After closing, BidCo owns the target shares and may pledge those shares to the acquisition lender, subject to the applicable company type, share form and corporate restrictions.

A share pledge can provide the lender with important enforcement protection if BidCo fails to repay the acquisition financing.

Due diligence should determine:

• Whether share certificates exist;
• Whether shares are registered or bearer;
• Whether existing pledges exist;
• Whether the articles restrict pledges;
• Whether corporate approvals are required;
• Whether the shares are already attached.

The pledge documentation must be coordinated with the actual legal nature of the shares.

Pledge Over BidCo Shares

Where BidCo itself has shareholders above it, lenders may also request a pledge over the shares of BidCo.

This can provide an additional enforcement route.

Instead of immediately enforcing against the operating company’s assets, the lender may potentially enforce against the ownership interest in the acquisition vehicle.

The financing structure may therefore contain several layers of equity security.

The legal effectiveness and enforcement mechanics should be reviewed for every entity in the ownership chain.

Bank Account Security

Lenders may seek security over bank accounts containing acquisition proceeds or other funds.

Before closing, security may be established over an acquisition vehicle account into which equity and loan proceeds are deposited.

After the transaction, lenders may also seek security over certain operating accounts, subject to financial assistance and corporate benefit considerations.

The account bank, lender and borrower must coordinate:

• Account control;
• Withdrawal rights;
• Enforcement rights;
• Priority;
• Existing bank set-off rights.

Account security should not be analysed independently from the overall acquisition structure.

Security Over Movable Assets

Turkey permits non-possessory commercial security over qualifying movable assets under Law No. 6750 on Pledges over Movable Property in Commercial Transactions.

The legislation was introduced to expand the categories of movable assets and rights capable of being used as security and to facilitate access to financing through a public movable pledge registry. (Türkiye Büyük Millet Meclisi)

Potential collateral may include qualifying:

• Receivables;
• Inventory;
• Machinery;
• Equipment;
• Intellectual property;
• Commercial rights;
• Other movable assets permitted by the legislation.

However, where the collateral belongs to the target and secures debt used to acquire the target’s own shares, TCC Article 380 must still be considered.

The existence of a legally available security instrument does not mean that it may be used for every acquisition-finance purpose.

Real Estate Mortgages

Where the target owns significant real estate, acquisition lenders may seek mortgages.

This is common in transactions involving:

• Hotels;
• Manufacturing facilities;
• Logistics;
• Healthcare;
• Retail;
• Energy;
• Real estate-intensive businesses.

A mortgage directly securing the target’s ordinary business debt may be straightforward.

A mortgage granted by the target specifically to secure the buyer’s debt incurred to purchase the target shares presents a different issue because of financial assistance restrictions.

The purpose of the financing and the relationship between the acquisition and security must therefore be analysed.

Guarantees by the Target

Upstream guarantees are among the most sensitive elements of acquisition finance.

An upstream guarantee occurs where a subsidiary guarantees the debt of its parent.

After closing, the target is a subsidiary of BidCo.

If the target guarantees BidCo’s acquisition loan, questions may arise concerning:

• TCC Article 380;
• Corporate benefit;
• Capital maintenance;
• Directors’ duties;
• Related-party transactions;
• Creditor protection.

A board should not grant security merely because the parent company requests it.

The directors must consider whether the transaction is legally permissible and consistent with their duties toward the target company.

Corporate Benefit

Companies within the same group remain separate legal entities.

The target company’s assets do not automatically become assets of its shareholder after closing.

Accordingly, the target should receive or reasonably be able to justify a corporate benefit when assuming material obligations for other group entities.

Questions may include:

• Does the target receive refinancing?
• Is existing expensive debt being replaced?
• Does the transaction improve liquidity?
• Is the target gaining access to group financing?
• Is the guarantee disproportionate to any benefit obtained?

Corporate benefit cannot automatically cure a transaction prohibited by TCC Article 380, but it remains an important separate consideration for group guarantees and security.

Debt Pushdown

One of the principal economic objectives in leveraged acquisitions is often to move acquisition debt closer to the operating business.

This is commonly called debt pushdown.

The investor may prefer debt to sit at the target level because the target generates operating cash flow.

Possible post-acquisition methods discussed in transaction planning may include:

• Refinancing;
• Intercompany financing;
• Distributions;
• Corporate restructuring;
• Merger of acquisition and target entities.

Each method raises different corporate and tax issues.

There is no single automatic mechanism under Turkish law that permits acquisition debt to be transferred to the target immediately after closing.

Post-Closing Refinancing

A target may already have existing bank debt before the acquisition.

After closing, the group may seek a refinancing facility that refinances legitimate target-level indebtedness together with other group financing.

This differs legally from simply requiring the target to repay the original acquisition loan.

The financing purpose, use of proceeds and benefit received by each borrower or guarantor should be documented.

A refinancing cannot safely be structured merely as a paper mechanism designed to disguise prohibited financial assistance.

Substance should correspond with the contractual structure.

Dividend Distributions After Acquisition

Investors may expect that future target profits will ultimately be distributed to shareholders.

Dividend distributions must comply with Turkish corporate rules concerning:

• Distributable profit;
• Statutory reserves;
• Financial statements;
• General assembly approval;
• Capital maintenance.

A shareholder does not have an unlimited right to withdraw cash from the target simply because it purchased the company with borrowed funds.

Academic analysis of TCC Article 380 has specifically considered the relationship between post-acquisition dividends and the financial assistance prohibition, demonstrating that the timing, contractual commitments and purpose of distributions may become important in leveraged structures. (DergiPark)

Ordinary lawful profit distributions should therefore be distinguished from arrangements contractually designed in advance to cause the target to finance the purchase of its own shares.

Acquisition Merger or Upstream Merger

Another structure sometimes considered internationally is the merger of the acquisition company and target following completion.

If BidCo and the target merge, the assets and liabilities of the companies may ultimately sit within the surviving legal entity through universal succession.

This may alter the location of acquisition debt.

However, an upstream merger is not an automatic solution to the financial assistance prohibition.

The merger must independently satisfy the Turkish Commercial Code’s merger rules concerning:

• Permitted company combinations;
• Merger agreement;
• Corporate approvals;
• Shareholder protection;
• Creditor protection;
• Registration.

The commercial and legal purpose of the merger, solvency of the surviving entity and creditor position should be considered carefully.

Academic commentary on Turkish leveraged acquisitions specifically identifies upstream mergers as an important area of analysis in relation to the financial assistance prohibition. (Lexpera)

Creditor Protection

Leveraged transactions increase financial obligations within the acquisition structure.

Existing target creditors may therefore be concerned if the acquisition is followed by substantial additional leverage, guarantees or distributions.

Corporate decisions should consider whether they:

• Reduce the target’s ability to satisfy creditors;
• Remove valuable assets;
• Create excessive security for group debt;
• Cause capital loss or insolvency.

Where a merger is subsequently used, the specific TCC creditor-protection regime applicable to mergers also becomes relevant.

Directors should monitor the target’s financial condition continuously rather than viewing solvency only as a closing-date issue.

Acquisition Financing and Insolvency Risk

A highly leveraged business is more sensitive to reduced revenue, increased interest rates and liquidity shocks.

The financing documents typically contain:

• Financial covenants;
• Information undertakings;
• Events of default;
• Mandatory prepayment;
• Restrictions on distributions;
• Restrictions on additional debt;
• Restrictions on asset sales.

The acquisition agreement and financing documents should therefore be negotiated together.

For example, the SPA may require a post-closing earn-out while the acquisition financing documents restrict distributions or additional payments.

Conflicting obligations should be identified before signing.

Financial Covenants

Acquisition lenders may impose financial tests based on measures such as:

• Leverage ratio;
• Interest coverage;
• Debt service coverage;
• Minimum liquidity.

The borrower may be required to deliver periodic compliance certificates.

Breach may trigger:

• Increased interest;
• Restrictions;
• Mandatory equity injection;
• Event of default.

The definitions used for financial covenants should be coordinated with the company’s accounting practices and any post-closing integration plans.

Sponsor Equity

Private equity sponsors generally provide part of the acquisition financing as equity.

The lender may require the sponsor to fund its contribution before or simultaneously with debt drawdown.

The financing documents may therefore regulate:

• Minimum equity contribution;
• Equity commitment;
• Evidence of funding;
• Restrictions on withdrawal.

Where several investment funds participate, the lender may also examine each fund’s commitment and authority.

Shareholder Loans

Part of the sponsor’s financing may be structured as shareholder debt rather than pure equity.

Shareholder loans can provide flexibility for future repayments but raise legal and tax considerations.

The parties should analyse:

• Interest rate;
• Transfer pricing;
• Withholding tax;
• Subordination;
• Repayment restrictions;
• Currency;
• Maturity.

Acquisition lenders may require shareholder loans to be contractually subordinated.

The sponsor may therefore be prohibited from receiving repayment while senior acquisition debt remains outstanding.

Intercreditor Arrangements

Where different classes of lenders exist, an intercreditor agreement may determine priority.

The structure may involve:

• Senior acquisition lenders;
• Mezzanine lenders;
• Shareholder lenders;
• Hedging providers.

The intercreditor agreement may regulate:

• Payment priority;
• Enforcement standstill;
• Security sharing;
• Voting rights;
• Distribution of enforcement proceeds.

Turkish-law security documents should be coordinated with the contractual priority structure.

Contractual subordination should not be assumed automatically to change statutory security priority against third parties.

Acquisition Financing Conditions Precedent

Before releasing acquisition debt, lenders usually require extensive documentation.

Typical conditions may include:

• Executed SPA;
• Corporate resolutions;
• Due diligence reports;
• Regulatory approvals;
• Competition Authority approval where applicable;
• Equity funding evidence;
• Security documents;
• Legal opinions;
• Funds flow memorandum.

The buyer should coordinate the SPA closing conditions and the loan agreement conditions carefully.

A transaction can fail if the buyer is contractually required to close under the SPA while the bank is not yet required to release financing.

Certain Funds Protection

In competitive acquisitions, sellers may resist a broad financing condition.

A seller generally does not want the buyer to withdraw simply because its bank decides not to lend.

The buyer may therefore need committed financing before signing.

The SPA and financing documents should align so that the buyer has sufficient certainty that acquisition funds will be available once the transaction’s agreed conditions are satisfied.

Funds Flow

A leveraged acquisition requires precise closing mechanics.

A funds flow may provide that:

1. Sponsor equity is transferred to BidCo.
2. Acquisition lenders fund the loan.
3. Existing target debt is repaid if agreed.
4. Security releases are obtained.
5. Purchase price is paid to sellers.
6. Shares are transferred.
7. New security becomes effective.

The sequence is important.

A lender will not want to release funds before receiving satisfactory security, while the seller will not transfer shares before receiving the purchase price.

Escrow or carefully coordinated simultaneous completion may be necessary.

Existing Target Debt

The target may already have financing that becomes repayable because of the acquisition.

Loan agreements commonly contain change-of-control clauses.

A buyer should therefore identify during due diligence:

• Existing loans;
• Outstanding balance;
• Early repayment fees;
• Security;
• Guarantees;
• Change-of-control provisions.

The acquisition financing may need to include sufficient funds to refinance this debt at closing.

Failure to account for existing debt may create a significant purchase-price or liquidity problem.

Release of Existing Security

Existing lenders may hold:

• Share pledges;
• Real estate mortgages;
• Account pledges;
• Receivables security;
• Movable pledges.

Closing should ensure that the old lender releases security in return for repayment.

New lenders can then establish the new acquisition security package.

Release and creation of security should be sequenced carefully so that the target does not remain accidentally subject to both old and new financing arrangements.

Merger Control

Acquisition financing does not usually determine whether Competition Authority clearance is required, but financing and closing schedules must account for the regulatory timetable.

Where the acquisition cannot close before competition approval, acquisition debt should generally not be drawn irreversibly months before clearance unless the financing structure expressly contemplates that situation.

Bridge financing and commitment periods should therefore match realistic regulatory timelines.

Foreign Acquisition Lenders

International lenders may finance Turkish acquisitions from outside Turkey.

Cross-border financing may raise issues concerning:

• Foreign currency rules;
• Withholding tax;
• Security formalities;
• Turkish banking regulations;
• Enforcement;
• Governing law;
• Foreign judgments and arbitration awards.

Foreign-law loan agreements may coexist with Turkish-law security documents.

For example, the facility agreement may be governed by English law while Turkish share pledges and mortgages are governed by Turkish law.

The documents should be designed as a single enforceable financing package.

Tax Considerations

Acquisition financing has significant tax implications.

Relevant issues may include:

• Interest deductibility;
• Thin capitalisation;
• Transfer pricing;
• Withholding tax;
• Banking and insurance transaction tax;
• Foreign exchange;
• Debt pushdown;
• Merger taxation.

A structure that is valid under corporate law may still be tax inefficient.

Similarly, a structure that appears tax efficient cannot be used if it violates the TCC financial assistance prohibition.

Tax planning and corporate-law analysis should therefore occur simultaneously.

Directors’ Liability

Directors who authorise unlawful guarantees, loans or security may potentially face liability toward the company, shareholders or creditors where statutory conditions are met.

The board should therefore receive sufficient information before approving acquisition-related financing.

Board minutes may document:

• Purpose of transaction;
• Benefit to company;
• Financial condition;
• Security value;
• Advice received;
• Relevant legal restrictions.

A board resolution should not merely state that a transaction is “in the company’s interest” without supporting analysis where the company assumes substantial third-party debt exposure.

Common Acquisition Finance Risks in Turkey

Common mistakes include:

• Using a foreign LBO template without reviewing TCC Article 380;
• Requiring the target to guarantee acquisition debt at closing;
• Assuming target real estate can automatically secure the buyer’s loan;
• Confusing target cash with buyer cash;
• Ignoring corporate benefit;
• Failing to review existing security;
• Missing change-of-control clauses in target loans;
• Using shareholder loans without tax analysis;
• Assuming acquisition debt can automatically be pushed down after closing;
• Completing a merger solely to move acquisition debt without analysing creditor protection;
• Failing to coordinate financing and SPA conditions;
• Drawing acquisition debt before regulatory approval;
• Using security documents inconsistent with the target’s actual asset ownership.

Practical Acquisition Finance Checklist

Before financing an acquisition of a Turkish company, parties should generally:

1. Determine the acquisition vehicle.
2. Establish the equity and debt funding proportions.
3. Review TCC Article 380 financial assistance restrictions.
4. Identify existing target debt.
5. Review change-of-control provisions.
6. Map existing pledges and mortgages.
7. Determine permissible acquisition security.
8. Prepare target and BidCo corporate benefit analysis.
9. Structure shareholder loans and subordination.
10. Analyse movable and real estate security.
11. Review financial covenants.
12. Coordinate SPA and financing conditions precedent.
13. Assess Competition Authority and regulatory timing.
14. Prepare lender and borrower corporate approvals.
15. Prepare a detailed closing funds flow.
16. Coordinate repayment and release of existing lenders.
17. Establish new security at the appropriate stage.
18. Analyse tax consequences and interest treatment.
19. Review any proposed debt pushdown or post-closing merger separately.
20. Monitor leverage and solvency after closing.

Conclusion

Leveraged buyouts are possible in Turkey, but acquisition financing must be structured around the Turkish Commercial Code’s capital-protection rules.

The most important restriction is TCC Article 380. A Turkish joint-stock company cannot validly provide an advance, loan or security for the purpose of enabling another person to acquire its shares, subject only to limited statutory exceptions.

This rule makes target guarantees, mortgages, account pledges and other forms of target-level acquisition security particularly sensitive.

Acquisition lenders may instead rely on carefully structured security at the acquisition vehicle level, including share pledges, while post-closing refinancing and corporate restructuring require separate analysis.

Debt pushdown should not be treated as an automatic post-closing exercise. Dividends, refinancing, intercompany financing and mergers each have distinct corporate, tax and creditor-protection consequences.

A properly structured Turkish LBO therefore requires the acquisition agreement, financing documents, security package, tax structure and post-closing plan to be designed together.

The objective is not simply to maximise leverage, but to create a financing structure that remains legally enforceable, tax-efficient and sustainable for the target company after the acquisition has closed.